What Is a Guarantee Letter?

If you’re a businessman, you’ve probably dealt with transactions that require you to secure a guarantee letter. Big-time business deals like purchasing expensive company equipment overseas need a safety net. This is where third persons come in, to act as insurance that payment will definitely be made. Typically, you ask a guarantee letter from your bank, and the bank will make sure to have funds ready to pay your supplier in case you can’t pay for it. In the case of business corporations, they may choose to have a bank guarantee their transaction or choose a personal guarantee which we will discuss later on.

Where Do You Use a Guarantee Letter?

When we make life decisions, big or small, we’d want to ensure our safety. That’s why we purchase insurance to have protection in case something unexpected occurs. Having that sense of security will ease us to venture into transactions. That’s what guarantee letters are used for: to serve as security. A guarantee letter is commonly used to secure the following:

Personal Debt: Successful businesses are built using a substantial amount of capital. If you’re in the process of starting your own business, borrowing money from your family, friends, and financial institutions such as banks and lending companies is not a shock. To keep your business afloat, you need to invest money. Usually, when you take a loan from a bank or lending company, they will ask for collateral. It can be your assets such as personal or real property, shares of stock in a company, or cash on account. However, if you have none of those, they’ll ask you to secure a guarantor instead. Your guarantor should be financially capable of settling the loan. However, do not misinterpret; you’re the one primarily responsible for paying for the loan. A guarantor is merely secondarily liable, meaning the bank or lending company will only go after him and his assets should you fail to pay your personal debt.Business transaction: Part of running a business is entering into numerous business transactions. You’ll find yourself entering into contracts like purchase agreements with other companies. However, if you’re a start-up business with little to no reference, other companies will be hesitant to enter into a transaction with you. Hence, they’ll require you to furnish a guarantee letter from a trusted bank to secure the business transaction. You can also use personal guarantees instead of bank guarantees. In a personal guarantee, you, in your capacity as owner of the company, guarantee the payment under the contract. In case company funds are unable to pay the purchase price, your personal assets will become liable.Visa application: Being the owner of a company, it’s not uncommon to spend on your employee’s training. Some employers send their most valued employees out of the country and pay for international seminars. Other times, they’re shipped abroad to conduct business for the company. In both cases, a guarantor letter is required. One of the most famous people to do business with are Japanese tech companies. If you send an employee to Japan to conduct business for you, you’ll need to apply for a Japan visa. One of the requirements is to secure a letter of guarantee.

How to Write a Guarantee Letter

Writing a guarantee letter is the same as making a promise. Promises carry with it a great responsibility. When you make a promise to someone, you need to be sure that you can follow through or else you’ll lose your credibility. That’s why we should only commit ourselves to things or persons we are confident in; just like being in a relationship. We need to be positive that we can take on the responsibilities attached to it before entering into one. To help you be sure that you’re serious enough to furnish a letter of guarantee for someone, here’s something that can help you:

Step 1: Know what you’re getting into

When you fall in love with someone, you don’t fall in love instantaneously. You need to go through the process of getting to know each other. Just like agreeing to be a guarantor. You need to read the entirety of the guarantee arrangement. Get to know the principal agreement. Is it for a loan? If so, what kind of loan? How much is the guarantee covering? If you feel like the terms are agreeable, and you have the means to cover the amount, then go for it.

Step 2: Meet with the person you’re guaranteeing

Have you ever heard of the expression “if it looks good paper, it might be too good to be true?” Solely reading a piece of paper containing a proposal should not be enough to convince you to sign a guarantee letter. By agreeing to meet in person, you can see the sincerity in a person through his facial expressions and tone. You’ll be able to tell if he’s serious about entering into the business transaction and how it will mean to him if you’ll be his guarantor.

Step 3: Negotiate on the terms

When enough is enough. You need to set your limits on how much guarantee coverage you’ll agree to and for how long it’s valid. You might care for the person too much, and your emotions will cloud your judgment; which will lead to you agreeing to cover more than you’re capable of. You should take caution and set up preventive measures from giving too much. That’s why you need to set a definitive figure. Only agree to a reasonable amount of guarantee coverage. Guaranteeing is a financial risk, and you would want to minimize that risk.

Step 4: Write your letter

You’ve finally decided to take that risk. First, you should cover the basics. What are the essentials that go into a guarantee letter? Who is it addressed to, how much is the guarantee covering, and how long will the guarantee last for?—Address your guarantee letter to the creditor of the person you’re guaranteeing. The amount and duration will depend on your financial capacity and what you’ve agreed on during the negotiation phase. Lastly, a guarantee letter is a formal document, so be sure to write it with a firm and convincing tone.

Step 5: Have it checked by professionals

When you write and sign a guarantee letter, it’s the same as entering in a valid and binding contract. You’re making a legal promise. Breaking that promise would have legal repercussions. Have professionals with an elaborate understanding of the law review your document. You can hire the services of a lawyer for guarantees that cover a considerable amount of money or your local accountant or bank. This way, you will be able to know the extent of the severity of the contract you’ll be agreeing to.

FAQs

Is a guarantee letter the same as a letter of credit?

Let’s say you want to purchase high-end computer parts from Japan in bulk for your computer shop here in the US. You negotiate with the seller and agree that you will only pay a portion of the purchase price as down payment and pay the balance once the parts are delivered. The seller agrees, provided you furnish him with a guarantee letter or letter of credit from a trusted bank. Both options are beneficial to him; however, as a buyer, you should choose a letter of credit. In a letter of credit, payment of the balance is paid by the bank once items are delivered. On the other hand, for guarantee letters, there is a guarantee that the seller will receive full payment from the bank despite non-delivery or non-payment of the buyer.

How do I obtain a guarantee letter from my bank?

First, you need to assess whether you have a good relationship with your bank. Ask yourself if you have a good credit history. If you do, then you’re great. You can call your bank and set an appointment. Most banks will require you to fill out a guarantee application form where you need to provide the reason, the amount, and duration of the guarantee. Once you’ve filled out the form, you will be interviewed by a bank personnel to further elaborate on the guarantee request. In the interview process, the bank personnel usually asks if you have assets such as money in another bank, shares of stock, and property. Some banks may require your assets as a pledge in turn for the guarantee. If everything goes smoothly, they’ll furnish your guarantee letter.

Can a bank guarantee be canceled?

Yes. All you have to do is simply return the guarantee letter to the person or banking institution issuing it. However, some banks might require you to furnish a discharge letter from the beneficiary before it can cancel a bank guarantee. A bank may also cancel it’s guarantee automatically in the case of its non-use. In this instance, the banks will ask your beneficiary to return the original guarantee letter. After the lapse of a reasonable time from receipt, the bank will automatically cancel the guarantee.

Can I get out of a personal guaranty?

Legally, you cannot. However, there are options to protect yourself and your business. You can try to renegotiate the terms. For example, negotiate a shorter period for the personal guarantee or provide an alternative paying scheme. If you cannot reach an agreement with your creditor, you may want to opt for bankruptcy. It’s not preferred, but companies declare bankruptcy as one way to discharge its owners from a personal guarantee.

How to write a guarantor letter for visa application?

First, begin by indicating the name of your addressee, which is the name of the embassy, you’ll be applying for a visa. Write the date. Start the letter with a formal greeting. Introduce yourself—provide personal information like your full name and passport number. State the name of the person whom the guarantee letter is made for and provide his personal information. Signify your intention to guarantee the travel and living expenses of the person applying for the visa in case he is unable to pay himself. And lastly, sign the letter with your full name and signature. Concerning formatting, some countries might require a specific format. You should check on the country’s embassy website or call their office to ask for the specifics.

There’s a lot that goes on in a loan process. You’d think the concept is uncomplicated. To ask another person to lend you some money with a promise that you’ll pay him back. But sadly, it’s not that simple. People want to have security to safeguard them and their interests. That’s why we have insurance companies, bondsmen, and financial institutions like banks and lending companies to help not only in a business transaction process but also with other affairs that we deal with on a day to day basis.